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Warren Buffett -- Winnipeg-style

Tim Burt's investment philosophy a foundation of his Cardinal Capital firm's success

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Tim Burt was preaching to the choir at a recent luncheon where he was the guest speaker.

Like him, most of the attendees were investment analysts.

So they were well-versed in Burt's topic, the basics of value investing -- an investment philosophy made famous by Warren Buffett.

Considered one of the world's most successful investors, with the vast wealth to back it up, Buffett earned his nickname the Oracle of Omaha because of his ability to buy undervalued companies that eventually become highly valued ones.

Although a familiar subject for Burt's audience, considering the luncheon was a Winnipeg CFA (Chartered Financial Analyst Society) gathering, a good portion would also know his take on the investment philosophy well, since he probably has had a hand in their careers at one time or another. Some may have taken the securities-analysis course Burt taught at the University of Manitoba more than a decade ago. Others are employed at his firm Cardinal Capital Management, or at least have been in the past.

At the very least, every one of them is familiar with his story.

Burt is one of the elder statesmen in Winnipeg's investment analyst community. He has almost 40 years in the business, and for more than 20 of them, he has been building one of the most successful independent investment houses in the city's history. Today, Cardinal Capital manages more than $1.5 billion -- all the while emulating Buffett's conservative technique of selecting stocks to build wealth over the long-term.

Although value investing is foundational subject matter for investment analysts, its principles can be a revelation for amateur investors looking to improve their investment knowledge.

So after the lunchtime talk, Burt spoke with the Free Press to offer some insights about the market philosophy that has made himself, Buffett and countless others successful long-term investors.

"Value investing is trying to determine a fair value for a stock using various metrics, or quantitative tools, and based on that analysis, determining whether the stock is a good buy or not," Burt says.

It's more than just buying low and selling high -- though that is ultimately the goal of any investment style.

And value investing stands in stark contrast to its flashier cousin, growth-style investing, which is largely based on forecasting if a fast-growing company will continue to have high growth.

Rather, value investors generally avoid companies that have rapidly rising and high-flying stock prices, such as Tesla and Lululemon Athletica.

Electric luxury carmaker Tesla, for example, is only now turning a small profit, yet its stock price has almost quadrupled in the last year to nearly $100 a share.

Yoga-wear maker Lululemon hasn't had quite as dramatic a rise of late, but its stock price, in the $60-something range, is still considered expensive by value investors -- even after losing a chunk of its value this week when its CEO resigned.

They still consider its stock price inflated because, for example, its price-to-earnings ratio (P/E) is in the 30s.

For those unfamiliar with this stock measurement, the P/E ratio is the most widely used metric in value investing. Often referred to as "multiples," it measures how much investors are willing to pay for every dollar of a company's earnings.

The higher the P/E, the more likely the stock price is overvalued. Determining how high is high requires comparing a company's P/E to its competitors. In the case of Lululemon, other apparel makers have P/Es in the teens, so to value investors, the company's stock seems pricey.

"The difference between an undervalued stock and an overvalued stock is really market psychology," Burt says. "It's how investors feel about those companies, and as investors are more optimistic, they tend to overprice stock. As investors become more pessimistic, they tend to undervalue stocks."

Value investors aim to buy the undervalued stocks. These are companies with good earnings and bright futures, but their stock price doesn't yet reflect these qualities.

Typically, value investors look for stocks with P/Es lower than stocks in the same sector. Yet this metric alone is by no means a perfect measure of a stock's value.

A company can have good earnings, a low stock price and, as a result, a low relative P/E value. But investors could have a good reason to be lukewarm about the stock. A firm might be profitable now, but the consensus is its future is bleak.

For instance, Research in Motion (now BlackBerry) had good earnings just two years ago even though it was already being clobbered by Apple, Samsung and others. Even though its share price had been in free fall, it remained profitable. As a result, the Canadian tech firm's P/E made it appear to be a bargain, at least until it reported losses last year, which nullifies the P/E measurement altogether.

Burt says companies with a falling P/E ratio, such as BlackBerry, may be "in a death spiral."

That doesn't mean they are down and out. Sometimes they recover like Apple. Once on its deathbed, Apple became one of the world's most profitable publicly traded stocks. But recovery is rare.

Sorting the bargains from the soon-to-be failures is where the real work begins for value investors. They get down to the finer details about a company's current and future positions relative to its competitors and ignore the manic pricing of investor psychology.

"It (valuation) is a pendulum. It swings back and forth from one extreme to the other -- from over-valuation to undervaluation," Burt says.

"That's not just true with individual stocks, it's true with the stock market. That's why you see low valuations at bear-market bottoms like March 9, 2009."

When it comes to markets, however, value investors are largely agnostic. They largely don't care whether markets go up or down -- at least over the short term. Their concern is about the companies they own.

They look for companies with good track records of steady growth, often with long histories of increasing dividends.

"We're not market timers. We don't sit on cash. We're always fully invested," he says.

This is because even when the market looks over-valued, it can always go higher longer than anyone can predict. In other words, you could sit on the sidelines waiting for a crash that may never come.

"At the same time, if you stay in the markets and they continue to go up, you're going to benefit," he says.

"And then if they drop 20 per cent, at least it's a good opportunity to buy more stocks."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition June 15, 2013 B12

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